The chemicals sector is always subject to change. It is almost at the behest of geopolitical movements, whilst energy prices, shipping costs and supply chain disruptions always have an impact. At the same time chemicals producers are having to manage the move towards environmentally-friendly products, as ESG pressures increase all of the time.

As a result, mergers and acquisitions (M&A) is becoming a commonly used tool to mitigate any downturns. Around 20% of the sector has changed ownership in the past decade, which means that M&A is most certainly a real driver for change.

They key drivers for this M&A have been consolidation and product portfolio expansion. With production volumes rising from a static period during 2022 and 2023, it can only be expected that further acquisition and disposal activity will materialise.

Another key theme in the sector is the search for ever more environmentally-friendly chemical products, as well as the issues of decarbonisation and sustainability, particularly in such areas as plastics. The reduction of greenhouse gas (GHG) emissions is another important factor. Areas of the sector such as ammonia, ethylene and propylene production are particularly subjected to these issues. As a result, producers will need to make significant investments or consider relocating plants closer to cleaner energy sources in order to meet any net-zero targets.

All of these decisions are having a clear impact on the level and type of activity which chemicals companies are considering. Meanwhile, whilst the sector has seen quite a significant number of mega transactions over recent years, the largest volume of transactions still happens in the mid-market, involving transactions valued at between £10m and £250m.

In terms of the regional focus for M&A activity, the bulk of this takes place in areas where chemicals production is concentrated. Having said this, there is a growing appetite for inter-regional activity, as many companies look to move away from mature markets and diversify their customer bases and supply chains, a form of forward and backward integration. As a result, it is expected that many more Asian chemicals groups will look for acquisitions in Europe and North America.

In terms of specific sub-sector activity, the following can be observed:

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• Agricultural chemicals and fertilisers is a space that is underpinned by relatively strong agricultural commodity prices. The M&A activity in this area is never dramatic but when it happens it tends to be at larger end of the spectrum.

• Chemicals distribution is always a hot bed for M&A activity. There are numerous large global groups in this space, such as Azelis SA, Brenntag AG, IMCD NV and Univar Inc, who recognise that consolidation through acquisition is a key driver for growth.

• Commodity chemicals has typically seen many players exiting from this segment, with the environmental and sustainability constraints causing real hardship. Having said that, there remain active consolidators in this segment who know that these basic raw materials are integral to so many downstream elements of the chemicals sector. On such consolidator is INEOS Ltd of the UK, which continues to use its considerable firepower to make acquisitions

• Speciality chemicals is of course the main area of activity for M&A in the chemicals world, with players looking to diversify or enhance their products offerings through ever more innovative chemical materials. Equally, the M&A activity in this segment is always significant, with buyers looking for highly differentiated products offering and new routes to market.

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Private equity (PE) has always played a significant role in the chemicals sector and this seems to only ever be increasing. In the past decade alone, PE has been involved in nearly 25% of all transactions in the sector. They have recognised that chemicals companies are the ideal basis for implementing much leaner production structures, as well as creating much more cost-effective business platforms with more direct routes to market. It has become evident that under PE ownership, a great many chemicals companies have improved their profit margins, allowing their PE owners to eventually sell them for considerably more. Interestingly, PE hold periods in the chemicals sector have also lengthened, which means that there are likely to be many more chemicals companies sold by PE in the coming years.

In terms of valuations in the speciality chemicals sector, the range of multiples paid for businesses can vary from anything between 8x and 12x EBITDA. With regard to the commodity chemicals sectors the multiples are more like 5x and 7x EBITDA. Meanwhile, in chemicals distribution they are typically between 6x and 10x EBITDA. In general it would not be expected that multiples would indeed be at these levels, with chemicals being a sector so focused on energy and oil-based raw materials. However, this just shows that the drive towards more speciality products is creating considerable advantages for players in the sector and making chemicals companies more valuable than would be expected.

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Constantine Biller is a Partner at Shaw & Co

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